Incidents:
Ziguang Co., Ltd. released the 2023 annual report and the first quarter report of 2024. In 2023, the company achieved revenue of 77.308 billion yuan, an increase of 4.39%; net profit to mother of 2.03 billion yuan, a year-on-year decrease of 2.54%; net profit after deducting non-return to mother of 1,675 billion yuan, a year-on-year decrease of 4.80%; and gross margin of 19.60%, a year-on-year decrease of 1.04pct. In the first quarter of 2024, the company achieved revenue of 17.06 billion yuan, a year-on-year increase of 2.89%; net profit to mother of 414 million yuan, a year-on-year decrease of 5.76%; net profit after deducting non-return to mother of 343 million yuan, an increase of 1.75%; and gross margin of 19.97%, a year-on-year decrease of 1.04pct.
New China's three operators are growing at a high rate of international business
The holding subsidiary Xinhuasan had revenue of 51.939 billion yuan in 2023, an increase of 4.27% over the previous year; net profit of 3.411 billion yuan. Domestic enterprise business progressed steadily, with revenue of 39.868 billion yuan, an increase of 1.86% over the previous year. The domestic operator business showed a strong momentum of development, with revenue reaching 9.869 billion yuan, an increase of 11.75% over the previous year.
The overall sales scale of the international business continued to expand, with revenue reaching 2.02 billion yuan, up 19.70% year on year; revenue from H3C brand products and services was 1.41 billion yuan, up 62.04% year on year. In the first quarter of 2024, Xinhuasan's revenue was 12.132 billion yuan, up 14% year on year; net profit was 754 million yuan, up 8.27% year on year.
Fully layout the AIGC field and achieve key breakthroughs
In 2023, the company officially launched the “AIGC Open Strategy”, comprehensively laid out the AIGC field and achieved key breakthroughs, pioneering the launch of the industry's first private domain large-scale model, Baiye Linxi; launched the world's first single-chip 51.2T800G CPO silicon optical data center switch; launched a variety of next-generation data center switch products such as 800G standard switches and next-generation intelligent computing AI core switches; and released submerged liquid-cooled switches and cold plate liquid-cooled switches. At the beginning of 2024, the company released a series of innovative products and solutions such as Aofei Computing Power Platform 3.0, G7 series modular multi-heterogeneous computing power servers, next-generation AI storage, intelligent computing network solutions, and S12500 series AI computing power cluster switches.
A number of products continue to lead the market share
According to IDC data, in 2023, the company ranked second with a market share of 32.9%, 34.2%, 28.4%, and 36.8% in the Chinese Ethernet switch, enterprise network switch, data center switch, and campus switch market share; enterprise network routers, X86 servers, GPU servers, and hyperconverged hyperconvergence ranked second with market shares of 30.9%, 15.8%, 19.7%, and 18.8%; UTM firewalls had a market share of 20.4%.
Profit Forecasts, Valuations, and Ratings
We expect the company's revenue for 2024-2026 to be 854.33/932.11/100606 billion yuan, respectively, with year-on-year growth rates of 10.51%/9.10%/7.93%, net profit to mother of 25.64/30.14/ 36.28 billion yuan, year-on-year growth rates of 21.92%/17.56%/20.37%, EPS 0.90/1.05/1.27 yuan/share, respectively, and a 3-year CAGR of 19.94%. Since the company is a global leader in next-generation cloud computing infrastructure construction and smart application services in the industry, based on comparable company valuations, we gave the company 30 times PE in 2024, with a target price of 26.89 yuan, maintaining a “buy” rating.
Risk warning: upstream supply chain risks; downstream customer demand falls short of expectations; overseas business development falls short of expectations; progress in acquiring minority shareholders' rights falls short of expectations, etc.